Trump did Canada a big favour when it comes to the future

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The United States sends tremendous support to its allies around the world, but the payback has typically been a more stable world — it doesn’t always work, mind you, as we have seen these past three years. But no country benefits more from a tranquil world than the U.S.

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Not to mention that America is the world’s economic powerhouse and has the resources, along with the self-interest, to support its allies in the Far East, Europe and the Middle East. Instead of running counter to domestic national security, the U.S. is playing the role of the world’s police force, and it does serve the national interest.

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It was American isolationism and late entry into the Second World War that extended the war and ended up making it far worse than it needed to be (thanks, Charles Lindbergh). The upfront costs of the post-war Marshall Plan ended up being a boon to the U.S. economy. The civilized world needs an engaged America, and for those who think differently, go back and re-read George Orwell’s 1984 dystopian classic — a masterpiece that never goes out of style.

Now, let’s examine U.S. President Donald Trump’s strategy of “reciprocal tariffs.” The effective tariff rate in the U.S. is 2.7 per cent. Did you know that the comparable levels in Germany, France, Spain, Sweden, Denmark, the Netherlands, Portugal, Hungary, Canada, Australia and Japan are all lower than 2.7 per cent? The only countries where it’s higher are the United Kingdom, China, Brazil, Mexico, South Africa, India and South Korea.

In other words, countries that have a 40 per cent share of U.S. imports are the ones that have tariff rates higher than the U.S. The rest do not. Under reciprocal tariffs, the president should actually be cutting tariffs against the other 60 per cent.

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The question is, why doesn’t anyone point this out? Or have we reached a point where facts no longer matter?

The more I think about it, the more I realize that the Trump administration will do all it can to ensure that the rest of the world resolves the American fiscal dilemma. Extending the 2017 tax cuts, ensuring that even more tax relief comes Americans’ way and allowing runaway spending on entitlements to persist to perpetuity in the face of daunting demographics have emerged as the primary policy choices, with the rest of the world left hanging to defray the costs.

Then again, the citizens of other countries do not vote in U.S. elections, so making others pay obviously has political benefits. Making really tough choices domestically is not something very many elected officials who aim to get re-elected have much of an appetite for.

What about Canada?

If Trump goes ahead with his tariff plan after a one-month delay, the economic detonation north of the border will resemble the recessions we had in the early 1980s and early 1990s, but it won’t be as bad as the fallout from the great financial crisis or the pandemic. But it will be bad.

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Canada can respond with tariffs of its own, though export taxes would be preferable. The best way to cushion the blow over the near term is to engage in a large-scale fiscal stimulus, and there is ample room for this, and for a massive easing in monetary policy.

Bank of Canada governor Tiff Macklem is correct that the central bank, with blunt tools, is not exactly a powerful antidote to a trade war with a country that absorbs 20 per cent of gross domestic product (GDP), but the reality is that the hit to aggregate demand is deserving of a powerful interest rate (and Canadian dollar) response.

Even without the tariffs having yet been imposed, a just-released Nanos survey shows economic optimism in Canada falling all the way back to where it was in the dark pandemic days of 2020. The uncertainty alone has created the conditions for a recession north of the border, and only the most myopic economic departments on Bay Street don’t see this unfolding in front of our very eyes.

The federal election can’t happen soon enough. The country needs a pro-growth agenda in a hurry. The incentive is finally there to remove interprovincial trade barriers, diversify trade abroad, move rapidly to fast-track approvals for mining projects and either invoke emergency measures or pay off who needs to get paid off to get the array of energy pipeline projects completed (which have been impeded by unnecessary political obstacles at a time when Ottawa buckled under the pressure — those days should be well behind us at this point).

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The best thing that has happened (not the only good thing) about the end of the Justin Trudeau era (and, correspondingly, the risk that the NDP will lose party status) is that the multi-year focus (from an economic development perspective) on stifling environmental protection barriers and acute regulations will move to the rear-view mirror. These were policies that have slowed or halted existing major energy projects altogether, which have impeded Canada from emerging as a global energy powerhouse.

It goes without saying that a majority Conservative government lacking “green thumbs” would be the political entity to finally get the ball rolling on advocating a future of pipeline expansion, especially with respect to liquefied natural gas exports to European and Asian markets.

The estimates out there, regarding ending the insane trade barriers between the Canadian provinces, are that they cost the domestic economy as much as $200 billion per year. There is a seven per cent boost to GDP right here.

And Canada needs to start competing head-on with the U.S. when it comes to deregulation and competitiveness broadly speaking (ending oligopolies in several key industries) and moving effective corporate income tax rates to the levels south of the border to redress the erosion in tax competitiveness, which the current government allowed to unfold with a lack of response to Trump’s fiscal moves nearly eight years ago.

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You have to break eggs to make an omelette. Trump is breaking Canada’s eggs (as expensive as they are down south, thanks to the avian flu). But a new government with a bold vision and willingness to take on self-interests at home and make the country more competitive, more productive, less regulated and less reliant on the U.S. will take those broken eggs and make an omelette that would make Julia Child proud.

Being shocked by a crisis can actually end up being a good thing in the long term if the shock lights a fire under the derrière of the political class to embark on fundamental reforms — call it my attempt to take a negative and see the positive.

David Rosenberg is founder and president of independent research firm Rosenberg Research & Associates Inc. To receive more of David Rosenberg’s insights and analysis, you can sign up for a complimentary, one-month trial on the Rosenberg Research website.

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